Why the UPA’s cash transfer scheme will boost poverty

The Centre is ready with the nationwide cash transfer scheme that will take off next year and deposit Rs 3.2 lakh crore per year in the bank accounts of 10 crore poor families by 2014. On paper, the idea is to bypass the leaky subsidy channels. But the scheme is also the UPA’s best bet for a third consecutive term.

The government plans to cover the target BPL families before the 2014 elections. If it succeeds, roughly 20 crore voters – considering every family on an average has two -- will benefit. If even half of them vote for the Congress and its partners, the alliance should be home again. In 2009 general elections, less than 12 crore votes ensured victory for the Congress. Its partners bagged another 2.43 crore.

But will cash transfer really help the UPA? The scheme is dubbed as fiscal-neutral. It will replace existing subsidies for PDS, fuel, fertilisers, wage schemes etc and will not burden the exchequer. The government’s bill on major subsidies towards food, fertiliser and petroleum in the current fiscal was pegged at Rs 1.8 lakh crore and has been climbing due to a falling rupee and the rising international crude price. Much of these subsidies go to people who are by no definition poor.

An archival image of a labourer working at a sugarcane wholesale market in the eastern Indian city of Siliguri March 16, 2010. Reuters

Poverty is debatable in India. The cash scheme targets 10 crore poor families or 45-50 crore people. The Sengupta, Saxena and Tendulkar committees, respectively, estimated 77, 50 and 37 percent of our population as poor. That roughly works out to be 90, 60 and 45 crore Indians. The Multidimensional Poverty Index (MPI) developed by the Oxford Poverty and Human Development Initiative with UNDP support put 65 crore as poor and another 20 crore as vulnerable to poverty.

Without getting into the relative merits of the different benchmarks used, it is safe to conclude that at least 85 crore Indians, or nearly 20 crore families, are impoverished. The majority of them are unquestionably poor. The rest is one illness or crop failure away from officially sinking below the fast-shifting line of poverty. All of them need help but, unfortunately, the government plans to hand out cash to only half of them while denying subsidies to all.

So, as 10 crore poor families get Rs 3200 every month, which, by government’s own expectation, will increase spending and trigger inflation, the other 10 crore families, nearly as poor, will have to fend for themselves in a non-subsidised, inflationary market. They will soon become poorer than those who now qualify for the cash scheme. Clearly, it is not enough to support only the poorest 10 crore families while leaving out another 10 crore who need it as much.

In any case, the one size fits all approach – a flat cash subsidy of Rs 3200 -- is unreasonable. There has been no clear word yet on linking it to inflation over time. Moreover, inflation and the price index itself is a regional phenomenon. Beyond the obvious urban-rural divide, prices vary widely between rural areas as well.

In such a scenario, Rs 3200 may be just enough for subsistence in many parts of India. Worse, productivity will be hurt. For example, very few of the 85 crore poor will be able to afford, with or without the cash dole, fertilizer and diesel at market price. This will affect agricultural output which, in turn, will pinch the economy and push the poor further into poverty.

Even the primary purpose of cash transfer cannot be secured merely by the intent. Where cash is involved, the incentive for manipulation gets much stronger than, say, siphoning off low-quality PDS grains which have a limited market. The test of transparency begins with the selection of the eligible for the scheme. In the past, scores of bona fide candidates were left out while the landed pocketed BPL cards.

The other challenge will be to ensure possession and control of cash. Having a bank account does not warrant transparency as has been evident from several case studies under schemes such as NREGA where the village strongman took possession of all banking documents and controlled the money in collusion with local bank employees.

Anyway, the cash transfer scheme as envisaged now is only feasible when the government’s Aadhaar database covers the entire BPL population, as bank accounts will be opened on the basis of Aadhaar’s unique identification number. In the last three years, Aadhaar has covered only 25 crore people, mostly in urban areas.

Therefore, it is unclear how the government has set the national deadline for cash transfer covering all 10 crore poor families before the 2014 elections when Aadhar itself does not target more than 50% of the population by the end of 2014. Worse, Aadhar’s penetration is very limited in some of the poorest states of India.

According to the multidimensional poverty index mentioned above, eight Indian states have a combined population of 42 crore poor. Out of these states, only Jharkhand (26.79%) comes close to the national average of population percentage covered under Aadhar. The rest -- Madhya Pradesh (17.55%), Rajasthan (14.04%), Orissa (9.42%), Bengal (5.53%), Uttar Pradesh (4.95%), Bihar (2.02%) and Chhattisgarh (1.23%) – have a lot of catching up to do.

The idea of direct cash subsidy has its merits. In Brazil, for example, put in the hands of the women in poor families, it made a difference. But it will not be easy to make it work at the gigantic scale that is India. Ideally, the government should work out regional benchmarks for minimum means of living and pay the deficit to families whose income falls short of that baseline. But that seems to be a near impossible task given how generic our poverty data is.

At the same time, cash transfer can perpetuate poverty among the poorest. These beneficiaries may not make any serious effort to better their lot lest a small increase in income disqualify them from receiving the monthly dole of R 3200. So, the scheme should have inbuilt incentives for families that invest in education or enterprise and breach the poverty barrier.

A desperate UPA is in too much of a rush to look into these issues, or even care. Since the subsidies will not be immediately withdrawn, some money in some people’s hands may earn it some votes for now. But eventually its results, and the country, will be poorer.